Low-Income Countries Need Extra Support to Cope With Crisis

Unprecedented scaling up of IMF financial support helped poorer countries

Governments must resist temptation to cut aid, engage in protectionism

Rich countries need to step up their support to poorer countries so they can quickly rebound from the crisis that came from the advanced economies, IMF Managing Director Dominique Strauss-Kahn said.

In a September 17 speech at the Center for Global Development in Washington, D.C., he observed that thus far, low-income countries have weathered the global financial crisis better than expected. “But low-income countries remain highly vulnerable”, he stressed, “so we cannot be complacent.”

Strauss-Kahn called on the international community to ensure that any global recovery also lifts the low-income countries. “These countries desperately need additional financing to tide them over, to give them adequate breathing space to cope with this crisis,” he said.

Strauss-Kahn emphasized that most low-income countries have responded well to the global financial crisis thanks to sound economic policies. “Since many of these countries ran good policies, they built foundations to ward off the storm. In the past, many low-income countries facing such a financial squeeze would have been forced to slash government spending, put administrative constraints on imports, or simply not pay their bills. But this time is different”, he said.

Improved policies

Because of improved policies, three quarters of low-income countries had been able to increase their budget deficits to help combat the crisis. Of 27 low-income countries with available data, 26 had managed to preserve or increase social spending—a significant achievement in the current environment.

There had also been an unprecedented scaling up of IMF financial support and policy advice to low-income countries, Strauss-Kahn noted. This had helped provide poorer countries with the necessary room to ease macroeconomic policies. The IMF had gone “above and beyond” what the G-20 London summit of advanced and emerging market countries had asked for in April.

The IMF has increased its concessional lending to $17 billion through 2014, and is front-loading this assistance so that $8 billion is available over the next two years. In addition, the IMF Executive Board approved zero interest payments up to the end of 2011 for all concessional loans and lower interest rates on a permanent basis thereafter.

Strauss-Kahn underscored that poor countries have longer-term needs for development financing that go well beyond the IMF’s mandate or capacity to provide. As the recent drought in East Africa suggested, there may be more challenges to come in the wake of the global crisis.

There was always a temptation for countries to retreat inwards, to look first at their own problems, and to respond primarily to domestic political needs and demands. ”But the world community cannot ignore the needs of the low-income countries, especially since the poorer countries are paying the price for rich country mistakes”, Strauss-Kahn stated. “Countries must resist the temptation to reduce aid, or to engage in trade or financial protectionism”.

■ For more information on support for low-income countries, see the IMF’s blogiMFdirect.

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